The California Department of Tax and Fee Administration (“CDTFA”) last week adopted Emergency Regulation 3701, Collection and Remittance of the Cannabis Excise Tax, clarifying that California’s Cannabis Excise Tax applies to sales of cannabis acquired before January 1, 2018, but sold to customers on or after January 1, 2018. These regulations are in addition to Emergency Regulation 3700, Cannabis Excise and Cultivation Taxes issued in late November.
Emergency Regulation 3701 was issued to close a perceived loophole in California’s Cannabis Excise Tax. Cannabis distributors and retailers have no room for error under Emergency Regulation 3701 and this blog post explains its requirements.
California’s Cannabis Excise Tax – The General Rules
Under MAUCRSA, cannabis retailers must collect the excise tax from their customers on every cannabis sale made on or after January 1, 2018. The excise tax is 15% of the Average Market Price. In turn, retailers must pay their distributors the excise taxes collected from their retail customers because distributors are ultimately responsible for remitting the excise taxes to the CDTFA.
Under MAUCRSA, no person is required to be a licensed distributor until January 1, 2018. The CDTFA recognized that on January 1, 2018, newly-licensed retailers will have cannabis inventory purchased before January 1, 2018, and such “pre-MAUCRSA Cannabis” not purchased from a licensed distributor. Emergency Regulation 3701 outlines the process for collecting and paying the excise tax on pre-MAUCRSA cannabis sales
So suppose Retailer A purchases pre-MAUCRSA Cannabis in 2017 and on January 2, 2018, purchases cannabis from Distributor Z for $100/ounce. The wholesale cost of cannabis to Distributor Z is $100 an ounce. The Average Market Price of an ounce is $160.00 ($100 x 1.6). The Cannabis Excise Tax due on the sale of the pre-MAUCRSA Cannabis is $24.00 ($160 x 15%) and Retailer A must collect this excise tax from its own customer.
Requirements of Emergency Regulation 3701 – Distributors
The distributor must, in turn, remit the excise tax to the CDTFA. The retailer must pay excise taxes collected from its customers to a distributor by the 15th of the month following the retail sale. Distributors must report and remit the tax to the CDTFA on that transaction as part of its ordinary compliance process and provide the cannabis retailer a receipt that provides the following:
- Payment date
- Distributor name;
- Retailer name
- Amount of the Cannabis Excise Tax;
- Retailer’s Seller Permit Number;
- Distributor’s Seller Permit Number. A Distributor not required to hold a Seller’s Permit must identify its exempt status.
So suppose Retailer A sells pre-MAUCRSA Cannabis on January 25, 2018. The excise tax collected from the customer is $24.00. Retailer A must pay the cannabis tax collected to Distributor Z by February 15, 2018. Distributor Z must report this transaction on its first-quarter Cannabis Tax Return for 2018 and pay the tax to the CDTFA by April 30, 2018, the due date of its first-quarter tax return.
Emergency Regulation 3701 — Open Issues
Emergency Regulation 3701 raises a number of questions, including the following:
- May a cannabis retailer choose one distributor to set the Average Market Price, but pay the excise tax to another distributor? In Example 2, Retailer A pays Distributor Z. Could Retailer A pay Distributor Q so long as it transacts business with Distributor Q?
- Can a cannabis retailer sell pre-MAUCRSA Cannabis before purchasing cannabis from a newly-licensed Distributor? It appears not, as at least one transaction must be completed with a distributor to set the Average Market Price.
- How are the emergency regulations implemented if the distributor is part of a Microbusiness?
These and other issues will presumably eventually be addressed in CDTFA’s Cannabis Tax Guide. In the meantime though, Retailers must be aware that every sale under MAUCRSA is subject to California’s Cannabis Excise tax regardless of the date the cannabis was placed into inventory. Retailers that fail to comply with Emergency Regulation 3701 are subject to penalties, including the possibility of losing their California Retailer license.
Speaking of MAUCRSA, four of my firm’s California cannabis lawyers will be putting on a FREE webinar on MAUCRSA tomorrow (December 18), entitled, What You Need to Know Now to Get Your California Cannabis License on January 1. This event will feature two of our Los Angeles-based cannabis attorneys, Hilary Bricken and Julie Hamill, and two of our San Francisco-based cannabis attorneys, Alison Malsbury and Habib Bentaleb. It will give an overview of the recently issued emergency MAUCRSA rules governing medicinal and adult use cannabis licensing and operations in California and cover the licensing process for each license type, operational standards for all license types (including renewable energy requirements for cultivators), the 6-month “transitional” period for product and operations, major changes between the MCRSA and MAUCRSA rules, and key unknowns posed by the rules. You can register for this free webinar by going here.